December 31, 2003, 12:00 AM

Napster goes legit with a multi-channel retail strategy

Not long ago, Napster was an icon of anti-retail forces that threatened the music industry. Today, it embraces retail with legitimate music file sales at its own web site and gift cards for sale at consumer electronics stores.

Internet Retailer

It wasn’t long ago that Napster stood as the icon of anti-retail forces that threatened the music industry. By making it easy for millions of users to freely share music files downloaded from the Internet, Napster was the bane of music retailers.

What a difference a few months and a new owner can make. Now a part of Roxio Inc., Napster has not only started legitimately selling digital music files at Napster.com, but it has also embraced the retail establishment. In mid-November, Napster began reaching out to consumers offline by making gift cards available in some 20,000 stores, including leading consumer electronics retailers RadioShack and Best Buy.

Roxio is a developer of consumer software for creating and editing digital music and videos. It sells its software through some of the same electronics outlets that will sell the Napster card and it figures it can leverage those retail relationships with the gift cards to bring more offline shoppers to Napster. “With distribution as diverse as big-box electronics retailers to drug chains, convenience stores and gas stations, we have dramatically increased our reach,” says Mike Bebel, president of Napster.

David Card, analyst with Jupiter Research who follows the digital music business, says Napster is making a smart move. “I’m a big fan of having a multi-channel presence in this market,” he says. “Physical stores should play a role in digital music.”

Apple Computer Inc. is already selling cards for its iTunes digital music service at Apple Stores. And another competitor is planning a similar move. Echo.com, an online digital music service formed by several retailers, expects to offer gift cards through the stores of its partner retailers. Its investment partners include Best Buy Co., Borders Group Inc., Tower Records and Wherehouse Music.

The Napster gift card offers 15 music downloads for $14.85. Roxio says they’re another way for many of its best customers-young people without credit cards-to purchase music at Napster.com. Gift card recipients use a unique code on each card to complete an online purchase. Participating retailers also include RiteAid, CompUSA, Safeway, ExxonMobil and Kroger.

Napster says sales of the gift cards are going as well as expected. Meantime, sales for Napster as well as other digital music sellers may improve even more thanks to a recent move by online payments processor PayPal, which is offering micro-payment processing fees at a savings of 30% or more over conventional fees. PayPal, a unit of eBay Inc., is charging digital music retailers a payment processing rate of 2.5% of the value of each transaction plus a fixed per-transaction fee of 9 cents. Until now, digital music retailers paid the conventional processing rate of 2% of the value of each transaction plus 20 to 30 cents per transaction.

The sound of sales ringing in digital music

As Roxio Inc.’s Napster, Apple Computer Inc.’s iTunes and other digital music services fight for the hearts and wallets of music fans, their efforts will coincide with a trend in hardware: the steady growth in the sales of MP3 portable digital music players. Sales of the players are expected to grow steadily over the next few years, nearly doubling to 3.5 million units this year over last year, Jupiter Research says in a new report, “Portable Music Device Forecast, 2002-2008.”

“We’re expecting to see a bunch of new services and hardware early this year,” says David Card, vice president and research director of Jupiter Research and the lead analyst for the report.

MP3 players will reach a critical mass in about 2006, when they will appear in 15-20% of households, a point where there will be enough of them in the market to spur even sharper growth in digital music services, Card says.

The report notes that 6% of online adults surveyed in October said they planned to purchase a portable music device over the following 12 months. It also notes that these potential purchasers of MP3 players are more inclined than other online adults to shop online. In the recent holiday season, for instance, the report notes that 60% of the MP3 player fans said they planned to do some or all of their holiday shopping online, compared to 39% for all online adults.

But Card says the move to digital music, though significant, will remain a small percentage of music sales for years to come. “The CD won’t be replaced any time soon,” he says, noting that digital music sales will probably come in at less than $100 million this year and over the next several years reach about 10% of the recorded music market, currently valued at about $11 billion.

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